Lenders to struggling shoe chain Nine West have watched the company’s debt soar to more than 20 times earnings, and there’s little they can do about it. Unfortunately for them, that’s exactly what they signed up for, Bloomberg News reported today. Nine West’s debt is “covenant-lite,” meaning it carries minimal protections for lenders should the company falter and little obligation to explain if something goes wrong. There are no limits on how much debt the company can hold relative to its earnings, and the only required disclosures are annual and quarterly reports, according to S&P Global Ratings analysts. The absence of specific metrics to meet or tests to pass leaves creditors with virtually no power to force answers from their borrower or changes in its behavior. It’s an example — a warning, some analysts would say — of what creditors can expect as they trade away traditional debt protections for extra yield. With past covenant-lite deals like Nine West and Weight Watchers International Inc. now causing headaches for their lenders, credit analysts and investors say that they’re seeing similarly loose terms more frequently on new loans and bonds. Just 35 percent of new leveraged loans issued in 2016’s first half had traditional covenants that require regular financial check-ups, compared with 100 percent in 2010, according to Xtract Research, which analyzes debt packages. Read more.
Don’t miss tomorrow’s ABI Workshop “Turnaround Lending 2016” for a market update for turnaround and restructuring lending. The program will also feature two panels, addressing a wide range of topics, including regulated and compliance issues impacting lenders. Register to attend in person or for a live web stream!
